G.R. No.

175651, September 14, 2016

PILMICO-MAURI FOODS CORP., Petitioner, v.

COMMISSIONER OF INTERNAL REVENUE, Respondent.

FACTS:

[PMFC] is a corporation, organized and existing under the laws of the Philippines, with principal
place of business at Aboitiz Corporate Center, Banilad, Cebu City. The books of accounts of [PMFC]
pertaining to 1996 were examined for deficiency income, value-added [tax] (VAT) and withholding tax
liabilities.

The foregoing Assessment Notices were all received by [PMFC]. On December 29, 1998, [PMFC]
filed a protest letter against the aforementioned deficiency tax assessments. In a final decision of the
[CIR], the deficiency tax liabilities of [PMFC] were reduced from P9,761,750.02 to P3,020,259.30. PMFC
filed its Petition for Review.

After trial, the [CTA] affirmed the assessments but in the reduced amount of P2,804,920.36
(inclusive of surcharge and deficiency interest) representing [PMFC's] Income, VAT and Withholding Tax
deficiencies for the taxable year 1996 plus 20% delinquency interest per annum until fully paid.

From the total purchases of P5,893,694.64 which have been disallowed, it seems that a portion
thereof amounting to P1,280,268.19 (729,663.64 + 550,604.55) has no supporting sales invoices because
of [PMFC's] failure to present said invoices.

The sales invoices contain alterations particularly in the name of the purchaser giving rise to
serious doubts regarding their authenticity and if they were really issued to [PMFC].

Besides, [PMFC] should have presented the following vital documents, namely,

1) Written Offsetting Agreement;

2) proof of payment by [PMFC] to Pilmico Foods Corporation; and

3) Financial Statements for the year 1996 of Pilmico Foods Corporation

to establish the fact that Pilmico Foods Corporation did not deduct the amount of raw materials being
claimed by [PMFC]. Considering that the official receipts and sales invoices presented by [PMFC] failed
to comply with the requirements of Section 238 of the NIRC of 1977, the disallowance by the [CIR] of the
claimed deduction for raw materials is proper.

PMFC] filed a Motion for Partial Consideration but PMFC's Motion for Reconsideration was
denied for lack of merit. PMFC then filed a petition for review before the CTA en banc which denied the
motion for reconsideration

ISSUES:
 The Honorable CTA First Division deprived PMFC of due process of law and the CTA assumed an
executive function when it substituted a legal basis other than that stated in the assessment and
pleading of the CIR, contrary to law. Since the legal basis cited by the CTA supporting the validity of the
assessment was never raised by the CIR, was PMFC deprived of its constitutional right to be apprised of
the legal basis of the assessment.

RULING:

The Court affirms but modifies the herein assailed decision and resolution. Due process was not
violated. CIR and PMFC both agreed that among the issues for resolution was "whether or not the
P5,895,694.66 purchases of raw materials are unsupported.

CIR had stated the material facts and the law upon which they were based. The CTA is not
bound to rule solely on the basis of the laws cited by the CIR. Were it otherwise, the tax court's
appellate power of review shall be rendered useless. PMFC was at the outset aware that the lack of
inadequacy of supporting documents to justify the deductions claimed from the gross income was
among the issues raised for resolution before the CTA.

The Court recognizes that the CTA, which by the very nature of its function is dedicated
exclusively to the consideration of tax problems, has necessarily developed an expertise on the subject,
and its conclusions will not be overturned unless there has been an abuse or improvident exercise of
authority.

MODIFICATION thereof, the legal interest of six percent (6%) per annum reckoned from the
finality of this Resolution until full satisfaction, is here imposed upon the amount of P2,804,920.36 to be
paid by Pilmico-Mauri Foods Corporation to the Commissioner of Internal Revenue.

NOTE: when a taxpayer claims a deduction, he must point to some specific provision of the
statute in which that deduction is authorized and must be able to prove that he is entitled to the
deduction which the law allows.

Statutory test of deductibility where it is axiomatic that to be deductible as a business expense,

three conditions are imposed, namely: (1) the expense must be ordinary and necessary; (2) it must be
paid or incurred within the taxable year, and (3) it must be paid or incurred in carrying on a trade or
business. In addition, not only must the taxpayer meet the business test, he must substantially prove by
evidence or records the deductions claimed under the law, otherwise, the same will be disallowed. The
mere allegation of the taxpayer that an item of expense is ordinary and necessary does not justify its
deduction.